Sept 1 (Reuters) - At least a dozen U.S. private equityfirms have been subpoenaed by the New York state attorneygeneral as part of a probe into whether a widely used taxstrategy that saved these firms hundreds of millions of dollarsis proper, a source familiar with the situation said onSaturday.

Bain was once headed by Mitt Romney, the Republicancandidate who hopes to unseat President Barack Obama in the Nov.6 election.

The subpoenas, which were sent out in July, seek documentsrelated to the conversion of fees these private equity firmscharge for managing investors' assets into fund investments, thesource said. This means the investigation predates the releaselast month of confidential Bain fund documents by Gawker thatrevealed such a practice.

The practice is known as a "management fee waiver." As fundinvestments, the income would be taxed as capital gains, whichattract rates around 15 percent. Without the conversion, thefees would be ordinary income, taxed at rates around 35 percent.

Jennifer Givner, a spokeswoman for New York Attorney GeneralEric Schneiderman's office, declined to comment. The firms werenot immediately available for comment.

The investigation comes in the midst of a heated U.S.presidential election campaign. Romney has been scrutinized forhis tenure as head of Bain, through which he amassed much of hisestimated $250 million fortune.

The timing of the probe and Schneiderman's credentials as aDemocrat could raise eyebrows in political circles.

Romney's record at Bain is already a target of attack byPresident Barack Obama's campaign and has put an uncomfortablespotlight on the industry. A probe into a potential tax dodge bythe industry could further play into the Democrats' hands.

Romney earned about $13 million in income over the past twoyears from carried interest, or the portion of a private equityfund's profits that goes to its managers, according to hiscampaign, which has issued a statement denying that he everprofited from using a management fee waiver.

With the latest probe, Schneiderman, who has been in officefor less than two years, follows in the footsteps ofpredecessors Andrew Cuomo and Eliot Spitzer, who played the roleof sheriff of Wall Street.

Schneiderman, who is co-chair of a mortgage crisis unitunder Obama, has looked into mortgage practices at banks. Otherhigh-profile cases involving financial institutions include aninvestigation of possible manipulation of the Libor benchmarkinternational lending rates by banks.

The tax probe is being conducted out of the New YorkAttorney General's Taxpayer Protection Bureau, which was set upin early 2011. The agency was established "to root out fraud andreturn money illegally stolen from New York taxpayers at noadditional cost to the state," according to the AG's website.

In April, the AG's office also sued Sprint Nextel Corp for more than $300 million, accusing the company of tax fraud bydeliberately not collecting or paying millions of dollars oftaxes for its cell phone service.

ALIGNMENT OF INTEREST

Private equity firms sometimes grant investors a waiver oftheir management fee - typically charged at 1-2 percent ofinvestments - in exchange for being able to use that capital astheir own investment income in the fund.

The benefit for the investor is recouping its fee, while thefund manager gets extra incentive to make the fund perform wellbut is also taxed less on this money.

The Internal Revenue Service has so far not banned such apractice, which some private equity fund managers argue is doneto align their interests more with those of their investorsrather than to reduce taxes.

They point out that money that is secure for the fundmanager as a management fee is being converted into carriedinterest, which is far from guaranteed.

The New York Times first reported news about the AttorneyGeneral's p robe.